Misunderstandings about Airline Growth

Growth has not led to bigger airplanes

Download 271.87 Kb.

Page	2/2
Date	11.02.2018
Size	271.87 Kb.
	#40766

1 2

Growth has not led to bigger airplanes
The trend in airplane size has been flat to declining, since 1985 (figure 3). It seems at first that bigger airplanes are better. Both engineering cost-per-seat-trip and econometric airline costs show economies of airplane size (ref 6). However this has not driven the industry to ever larger airplanes. In fact, 50% of the growth in ASKs is absorbed in increased departures in existing markets, 41% by net added airport pairs, and 13% by increased emphasis on longer markets. All this adds up to 104% of the ASK growth. Smaller airplanes explain 4% of the ASK changes

Figure 3: Airplane Sizes have Not Grown as Forecast

The evidence is the same in all regions of the world and has been strong and persistent. Big markets do not mean big airplanes. There is almost no correlation between seats per departure and seats per day in airport-pairs grouped by region or (long-haul) flow. Yes, the longer the haul, the larger the airplane, but within a distance and regulatory regime, bigger markets do not use larger airplanes. Nor do big airplanes persist in particular markets. Within 4 years, the average seats per departure in an airport pair market has lost half its correlation with the initial year. Markets with large airplanes get smaller ones, and vice-versa. Nor are small airplanes used in new markets. Average seats per departure are less than 5% lower in markets opened within 5 years than in markets that persisted through the period. Nor do larger airports use larger airplanes on average, except for very small cities. Among the top airports by region, those with greater departures per day actually run to slightly smaller average seats per departure. Finally, high-growth airports do not grow their average airplane size.

Smaller is Good
There are four things that drive growth away from larger airplanes. First, big airplanes spend more time on the gate and turn slower. This drives system costs--airplane ownership, gate rentals, and crew sit-time credits—up in a way that escapes capture by current engineering cost functions. After adjusting for inbound trip duration, an airplane takes 1 minute 10 seconds longer to turn for every 10 extra seats (ref 7). This translates into decreased airplane utilization (ref 8), as well as other cost increases.
Figure 4: Noise Per Seat is Higher for Large Airplanes

The second driver toward smaller airplanes is the value created by new frequencies. While larger airplanes can reduce airplane costs, reduced frequencies reduce travel value. A lower bound estimate of the size of this effect is that cost savings of 1.5% a year are avoided as the competitive market rewards added services over lowered prices (ref 13). Value can also be seen by measured fare premiums of $75 in the long haul and about half that in regional flying (ref 9).

A third driver toward smaller airplanes is that they reduce airport noise. The marginal increase in airport noise is lower for the same number of seat-departures using small airplanes rather than large. This is true in terms of the allowable noise under airplane certification rules, and even more true for trends across best-of-size current airplane designs (ref 10). A 300-seat airplane is allowed twice the noise-per-seat of a 150-seat airplane (four times the total noise), and trends show it being 6 times the total noise (figure 4) in practice.
Fig 5: Congestion Affects Small, Short-Haul Operations
F

inally congestion as a driver towards large airplanes is a mixed influence. Congestion does not drive networks towards large airplanes, at least across long-haul services. The share of 747 operations at major congested airports has declined over the last 20 years (1985-2005). The average share across NRT, HKG, HND, JFK, PEK, LHR, AMS, CDG, FRA, LGW, LAX, SFO, and ORD has gone from 19% to 9%, with declines at every one of these airports (ref 3). The only observed adjustments in congested airports seems to be a movement of small, short-haul services (110 and 150 seats) to slightly larger airplanes (150 and 200 seats), as seen in figure 5.^¹⁰ The share of the largest size shows significant decline.

Fares are Declining Gracefully
Industry real yields have been declining at 2-3% a year, but cost savings do not need to match this pace. As with so many economic discussions, this is more about the measuring technique than the phenomenon being measured. Yield is the average revenue per kilometer for air travel. Longer trips and leisure markets both have lower yields and both have lower costs. Trends have been towards both longer trips and a high leisure mix,^¹¹ but these are matched by intrinsically lower costs per passenger kilometer.
Longer trips have lower yield because fares have a per-trip component that is about 1500 kilometers. So the longer the trip taken, the lower the yield per kilometer, even if fares are unchanged.^¹² Some of the decline in yield are people are taking more long trips
Even more misleading is that yield is a mix of high-quality business travel and lower-cost leisure travel. The high-quality travel requires more space on the airplanes, higher frequencies, lower load factors, and more service labor. In short, it costs more. The same airplane and factor input costs would have half the cost per passenger trip, configured for a leisure market. What has happened in the last 30 years is that the mix of full-fare travel and leisure fare travel has moved from 2/3 full fare to 90% leisure.^¹³ This change in mix of fares changes the measured yield, even when the fares choices in individual markets are not changed.
Data show flat business fares and leisure fares declining by about 1% per year. This is based on US data. The wonderful thing about US yield data is that it is backed up by ticket data giving the fare distributions by airport pair.^¹⁴ US domestic data is public and allows detailed research into trends in fares. Taking the 90^th-percentile-fare as the “business fare” and the 25th-percentile fare as the “leisure fare,” we see what has happened to yields. Business fares have been almost constant, in real terms. Leisure fares have declined at 1% per year, while the mix necessary to algebraically “get” the average has risen. The result is that fares have declined at under 1% per year (ref 12).
The result of adjusting yields for mix of distances and mix of full-fare and leisure-fare usage means fares have gone down at a rate under 1% per year, in the sense that airlines needed to lower costs by that much to match. This is a fairly graceful decline. Manufacturing industries can show declines of 3% per year in prices, but service industries more normally improve by only 1% per year. The requirements for airlines match service industries.

Cost Savings Keep Coming
Cost savings have matched the 1% annual decline in fares. How have they done it? Fig 6 suggests that each new decade has brought cost savings from a different aspect of airline costs. The 1960s enjoyed the movement from props to jets. The 1970s gained from larger planes with higher-bypass ratio engines. The 1980s saw the large movement to discount tickets, higher load factors, and revenue management systems. The 1990s had the internet and the demise of travel agency fees. Since 2000 in the US at least, gains have come from competition with low-cost carriers forcing wage reductions and work rule changes for union labor to free-market levels.
Figure 6: Cost Improvements Keep Coming

The cost savings of the next decade are already started. The low-cost carriers have begun the focus on reducing costs for originating a trip. They have done the industrial engineering on airline activities at airports, simplifying check-in and boarding, and they have decreased ground times so that airplanes, gates, and personnel are more productive. This is likely to continue and to extend itself more broadly at the airport and beyond the airline. The airport has been said to be “everybody’s interface, nobody’s system.” However, system costs can be reduced if the players signal with appropriate marginal cost prices. This will lead to putting more people and more airplanes through the airport faster. Facility productivity in this sense will also mean faster trips for the passengers. Air passengers have always valued time savings.

In the more distant future, cost savings may come from ATC (Air Traffic Control) improvements. Fuel costs and climate change constraints will continue to ask for an ATC system with direct routings, and fewer queues. The history of airline costs has been that wherever someone has carved out a nice, protected, high-priced way of doing business, eventually the industry finds a way around them. Planes half-empty with piano bars are gone. Travel agents and their 10-15% of the ticket cost have vanished. Pilots that flew 45 hours a month at wages greater than senior management are history. Airports with lavish facilities and grandiose terminals are redesigning their operations. And nationally planned, balkanized ATC systems likely will find a way to reduce waste, improve costs, and give efficient price signals.

Plan the Future
This paper has been about trends in the development of airline industry systems: routes, fleets, and prices. When looking toward the future, a trend is a mere projection of past developments continuing. The examples say that intuitions about trends should be checked against data, because a good many of them prove incorrect.
A forecast is different from a trend, even when the values and lines are the same. A forecast is a trend where you know the reasons why things went the way they did. It involves understanding and calibrating causal relationships. That is, testing models against historical data, as we have tried in this paper. The great value of a forecast over a trend projection is that it can change direction. If the underlying causes change, the forecast changes. At the very least, the understandings from a forecast tell you where to look and what to look for when things start to change. Certainly a forecast should not call out a change the trend without explaining why.
A forecast is different from a wish. A forecast first understands trends, then it moves them forward. A good forecast does not change the trend, unless it puts forth a convincing reason why the underlying causes are changing.
The future is different again from a forecast. The future is what we try to make happen. If a forecast understands what has caused past trends, then an act of will can direct efforts to the underlying causes and make new trends. The best example of this is the development of secondary hub airports. A good-sized destination city, with a reasonable geographic location, can make itself into a hub and compete, if the facilities are well-designed, costs are reasonable, operations are well-run, and if no other secondary hub has already claimed the territory. Some hubs are born lucky, some hubs are started early, and some hubs have great air service only because they made their future by acts of will.

References:
All references below can be downloaded from the Seabury Airline Planning Group site: http://www.seaburyapg.com/company/research.html

Swan, William M. Consolidation in the Airline Industry, working paper (2004)
Swan, William M. How Airlines Compete, working paper (2002)
Swan, William M. Route Network History, Powerpoint Prestentation (2002)
Swan, William M. Airline Route Developments: A Review of History, working paper (2002)
Swan, William M. Pricing in Small Connecting Markets, Powerpoint Presentation (2004)
Swan, William M. and Adler, Nicole. Aircraft trip cost parameters: A function of stage length and seat capacity, Transportation Research Part E 42 (2006) pp 105-115
Swan, William M. Big Planes Turn Slower, working paper (2003)
Swan, William M. Turn Time vs. Ownership, powerpoint presentation (2003)
Swan, William M. Value of a Nonstop, Powerpoint Prestentation (2002)
Swan, William M. Fewer Departures Mean More Noise at Airports, working paper (1999)
Swan, William M RJs – Smaller than you Think, Powerpoint Presentation (2003)
Swan, William M. Prices, Fares, and Yields, working paper (2002)
Swan, William M. Three Classic Mistakes in Forecasting, Powerpoint Presentation (1999)

1 This statistic is measured by worldwide scheduled ASKs (Available Seat Kilometers) with August 2001 as the end date, to avoid complications from the September 2001 downturn. The year 2001 is before much of the recent upsurge in low-cost startup carriers.

2 World and Regional indices are calculated using airline total ASK shares in the world, or region.

3 The exception is North America, where competition increases can be seen at the passenger origin-destination (O-D) pair level but not at the airport-pair level.

4 A more detailed discussion of these values is available in ref 1.

5 US domestic travel is not included in this count, because it overwhelms shorter ranges.

6 Estimates for individual O-D passenger market sizes is proprietary, from Seabury Airline Planning Group. Ref 3.

7 US domestic data is the only publicly available data with either actual fares paid or actual O-D market sizes. However, the US market is generally held to be the direction other world markets are likely to take as they become increasingly deregulated.

8 See previous footnote.

9 Regional travel has more direct service than world totals, including longer hauls.

10 In fig 5, the increase in regional jets (<90 seats) is due to substitutions of 70-110 seat operations with multiple 50-seat operations in the US. This is driven by union wage exceptions for 50-seat jets (ref 11).

11 World-wide. European short-haul has been recently stimulated by low fares. The effect on the yield statistic is mixed, since even low short-haul fares are reasonably high-yield per kilometer.

12 Longer trips have higher fares, but lower yield.

13 This is the mix of fares used. The mix of trip purposes has changed much more slowly. However, business trips taken at leisure fares are served with the same cost advantages as pleasure trips.

14 US domestic data is publicly available and has fares actually paid and numbers of passengers paying for each origin-destination airport pair.. The only public data for the rest of the world is regional average yield levels. However, the US is generally held to indicate the direction the rest of the world is moving towards. And non-public data from other competitive markets agrees with these trends in competitive markets..

Download 271.87 Kb.

Share with your friends:

1 2